On robust pricing and hedging and the resulting notions of weak arbitrage
|
|
- Alexandra Greene
- 6 years ago
- Views:
Transcription
1 On robust pricing and hedging and the resulting notions of weak arbitrage Jan Ob lój University of Oxford based on joint works with Alexander Cox (University of Bath) 5 th Oxford Princeton Workshop, Princeton, March 2009
2 Outline Principal Questions and Answers Financial Problem (2 questions) Methodology (2 answers) Double barrier options Introduction and types of barriers Double no touch example Theoretical framework and arbitrages Pricing operators and arbitrages No arbitrage vs existence of a model
3 Robust techniques in quantitative finance Oxford Man Institute of Quantitative Finance March 2010
4 Model risk: Robust methods: principal ideas Any given model is unlikely to capture the reality. Strategies which are sensitive to model assumptions or changes in parameters are questionable. We look for strategies which are robust w.r.t. departures from the modelling assumptions. Market input: We want to start by taking information from the market. E.g. prices of liquidly traded instruments should be treated as an input. We can then add modelling assumptions and try to see how these affect, for example, admissible prices and hedging techniques.
5 Model risk: Robust methods: principal ideas Any given model is unlikely to capture the reality. Strategies which are sensitive to model assumptions or changes in parameters are questionable. We look for strategies which are robust w.r.t. departures from the modelling assumptions. Market input: We want to start by taking information from the market. E.g. prices of liquidly traded instruments should be treated as an input. We can then add modelling assumptions and try to see how these affect, for example, admissible prices and hedging techniques.
6 Robust pricing and hedging: 2 questions The general setting and challenge is as follows: Observe prices of some liquid instruments which admit no arbitrage. ( interesting questions!) Q1: (very) robust pricing Given a new product, determine its feasible price, i.e. range of prices which do not introduce an arbitrage in the market. Q2: (very) robust hedging Furthermore, derive tight super-/sub- hedging strategies which always work. E.g.: Put-Call parity, Up-and-in put
7 Robust pricing and hedging: 2 questions The general setting and challenge is as follows: Observe prices of some liquid instruments which admit no arbitrage. ( interesting questions!) Q1: (very) robust pricing Given a new product, determine its feasible price, i.e. range of prices which do not introduce an arbitrage in the market. Q2: (very) robust hedging Furthermore, derive tight super-/sub- hedging strategies which always work. E.g.: Put-Call parity, Up-and-in put
8 Robust pricing and hedging: 2 questions The general setting and challenge is as follows: Observe prices of some liquid instruments which admit no arbitrage. ( interesting questions!) Q1: (very) robust pricing Given a new product, determine its feasible price, i.e. range of prices which do not introduce an arbitrage in the market. Q2: (very) robust hedging Furthermore, derive tight super-/sub- hedging strategies which always work. E.g.: Put-Call parity, Up-and-in put
9 Robust pricing and hedging: 2 questions The general setting and challenge is as follows: Observe prices of some liquid instruments which admit no arbitrage. ( interesting questions!) Q1: (very) robust pricing Given a new product, determine its feasible price, i.e. range of prices which do not introduce an arbitrage in the market. Q2: (very) robust hedging Furthermore, derive tight super-/sub- hedging strategies which always work. E.g.: Put-Call parity, Up-and-in put
10 Q1 and the Skorokhod Embedding Problem Q1: What is the range of no-arbitrage prices of an option O T given prices of European calls? Suppose: (S t ) is a continuous martingale under P = Q, we see market prices C T (K) = E(S T K) +, K 0. Equivalently (S t : t T) is a UI martingale, S T µ, µ(dx) = C (x)dx. Via Dubins-Schwarz S t = B τt is a time-changed Brownian motion. Say we have O T = O(S) T = O(B) τt. We are led then to investigate the bounds LB = inf EO(B) τ, and UB = sup EO(B) τ, τ τ for all stopping times τ: B τ µ and (B t τ ) a UI martingale, i.e. for all solutions to the Skorokhod Embedding problem. The bounds are tight: the process S t := B τ t defines an T t asset model which matches the market data.
11 Q1 and the Skorokhod Embedding Problem Q1: What is the range of no-arbitrage prices of an option O T given prices of European calls? Suppose: (S t ) is a continuous martingale under P = Q, we see market prices C T (K) = E(S T K) +, K 0. Equivalently (S t : t T) is a UI martingale, S T µ, µ(dx) = C (x)dx. Via Dubins-Schwarz S t = B τt is a time-changed Brownian motion. Say we have O T = O(S) T = O(B) τt. We are led then to investigate the bounds LB = inf EO(B) τ, and UB = sup EO(B) τ, τ τ for all stopping times τ: B τ µ and (B t τ ) a UI martingale, i.e. for all solutions to the Skorokhod Embedding problem. The bounds are tight: the process S t := B τ t defines an T t asset model which matches the market data.
12 Q1 and the Skorokhod Embedding Problem Q1: What is the range of no-arbitrage prices of an option O T given prices of European calls? Suppose: (S t ) is a continuous martingale under P = Q, we see market prices C T (K) = E(S T K) +, K 0. Equivalently (S t : t T) is a UI martingale, S T µ, µ(dx) = C (x)dx. Via Dubins-Schwarz S t = B τt is a time-changed Brownian motion. Say we have O T = O(S) T = O(B) τt. We are led then to investigate the bounds LB = inf EO(B) τ, and UB = sup EO(B) τ, τ τ for all stopping times τ: B τ µ and (B t τ ) a UI martingale, i.e. for all solutions to the Skorokhod Embedding problem. The bounds are tight: the process S t := B τ t defines an T t asset model which matches the market data.
13 Q1 and the Skorokhod Embedding Problem Q1: What is the range of no-arbitrage prices of an option O T given prices of European calls? Suppose: (S t ) is a continuous martingale under P = Q, we see market prices C T (K) = E(S T K) +, K 0. Equivalently (S t : t T) is a UI martingale, S T µ, µ(dx) = C (x)dx. Via Dubins-Schwarz S t = B τt is a time-changed Brownian motion. Say we have O T = O(S) T = O(B) τt. We are led then to investigate the bounds LB = inf EO(B) τ, and UB = sup EO(B) τ, τ τ for all stopping times τ: B τ µ and (B t τ ) a UI martingale, i.e. for all solutions to the Skorokhod Embedding problem. The bounds are tight: the process S t := B τ t defines an T t asset model which matches the market data.
14 Q2 and pathwise inequalities Q2: if we see a price outside the bounds (LB,UB) can we (and how) realise a risk-less profit? Consider UB. The idea is to devise inequalities of the form O(B) t N t + F(B t ), t 0, with equality for some τ with B τ µ, and where is a martingale (i.e. trading strategy), EN τ = 0. Then UB = EF(S T ) and + F(S t ) is a valid superhedge. It involves dynamic trading and a static position in calls F(S T ). Furthermore, we want (N τt ) explicitly. We are naturally restricted to the family of martingales N t = N(B t,a t ), for some process (A t ) related to the option O t, e.g. maximum and minimum processes for barrier options.
15 Q2 and pathwise inequalities Q2: if we see a price outside the bounds (LB,UB) can we (and how) realise a risk-less profit? Consider UB. The idea is to devise inequalities of the form O(B) t N t + F(B t ), t 0, with equality for some τ with B τ µ, and where N t is a martingale (i.e. trading strategy), EN τ = 0. Then UB = EF(S T ) and N τt + F(S t ) is a valid superhedge. It involves dynamic trading (N τt ) and a static position in calls F(S T ). Furthermore, we want (N τt ) explicitly. We are naturally restricted to the family of martingales N t = N(B t,a t ), for some process (A t ) related to the option O t, e.g. maximum and minimum processes for barrier options.
16 Q2 and pathwise inequalities Q2: if we see a price outside the bounds (LB,UB) can we (and how) realise a risk-less profit? Consider UB. The idea is to devise inequalities of the form O(B) t N t + F(B t ), t 0, with equality for some τ with B τ µ, and where N t is a martingale (i.e. trading strategy), EN τ = 0. Then UB = EF(S T ) and N τt + F(S t ) is a valid superhedge. It involves dynamic trading (N τt ) and a static position in calls F(S T ). Furthermore, we want (N τt ) explicitly. We are naturally restricted to the family of martingales N t = N(B t,a t ), for some process (A t ) related to the option O t, e.g. maximum and minimum processes for barrier options.
17 Q2 and pathwise inequalities Q2: if we see a price outside the bounds (LB,UB) can we (and how) realise a risk-less profit? Consider UB. The idea is to devise inequalities of the form O(B) t N t + F(B t ), t 0, with equality for some τ with B τ µ, and where N t is a martingale (i.e. trading strategy), EN τ = 0. Then UB = EF(S T ) and N τt + F(S t ) is a valid superhedge. It involves dynamic trading (N τt ) and a static position in calls F(S T ). Furthermore, we want (N τt ) explicitly. We are naturally restricted to the family of martingales N t = N(B t,a t ), for some process (A t ) related to the option O t, e.g. maximum and minimum processes for barrier options.
18 Q2 and pathwise inequalities Q2: if we see a price outside the bounds (LB,UB) can we (and how) realise a risk-less profit? Consider UB. The idea is to devise inequalities of the form O(B) t N(B t,a t ) + F(B t ), t 0, with equality for some τ with B τ µ, and where N(B t,a t ) is a martingale (i.e. trading strategy), EN τ = 0. Then UB = EF(S T ) and N(S t,a S t ) + F(S t ) is a valid superhedge. It involves dynamic trading N(S t,a S t ) and a static position in calls F(S T ). Furthermore, we want (N τt ) explicitly. We are naturally restricted to the family of martingales N t = N(B t,a t ), for some process (A t ) related to the option O t, e.g. maximum and minimum processes for barrier options.
19 Scope of applications Answer to Q1 and pricing: in practice LB << UB, the bounds are too wide to be of any use for pricing. Answer to Q2 and hedging: say an agent sells O T for price p. She then can set up our super-hedge for UB. At the expiry she holds X = p UB + F(S T ) + N(S T,A S T ) O T. We have E Q X = 0 and X p UB. The hedge might have a considerable variance but the loss is bounded below (for all t T). The hedge is very robust as we make virtually no modelling assumptions and only use market input. This can be advantageous in presence of model uncertainty transaction costs illiquid markets. Numerical simulations indicate that a risk averse agent prefers robust hedges to delta/vega hedging.
20 Scope of applications Answer to Q1 and pricing: in practice LB << UB, the bounds are too wide to be of any use for pricing. Answer to Q2 and hedging: say an agent sells O T for price p. She then can set up our super-hedge for UB. At the expiry she holds X = p UB + F(S T ) + N(S T,A S T ) O T. We have E Q X = 0 and X p UB. The hedge might have a considerable variance but the loss is bounded below (for all t T). The hedge is very robust as we make virtually no modelling assumptions and only use market input. This can be advantageous in presence of model uncertainty transaction costs illiquid markets. Numerical simulations indicate that a risk averse agent prefers robust hedges to delta/vega hedging.
21 References and current works Previous works adapting the strategy: (lookback options) D. G. Hobson. Robust hedging of the lookback option. Finance Stoch., 2(4): , (one-sided barriers) H. Brown, D. Hobson, and L. C. G. Rogers. Robust hedging of barrier options. Math. Finance, 11(3): , (local-time related options) A. M. G. Cox, D. G. Hobson, and J. Ob lój. Pathwise inequalities for local time: applications to Skorokhod embeddings and optimal stopping. Ann. Appl. Probab., 18(5): , As well as: forward starting options (D. Hobson and A. Neuberger,...) volatility derivatives (B. Dupire, R. Lee,...) double barrier options (A. Cox and J.O., arxiv: , ) variance swaps (M. Davis, J.O. and V. Raval)
22 Double barriers - introduction We want to apply the above methodology to derivatives with digital payoff conditional on the stock price reaching/not reaching two levels. Continuity of paths implies level crossings (i.e. payoffs) are not affected by time-changing. An example is given by a double touch: supt T S t b and inf t T S t b. 1 supu τ B u b and inf u τ B u b In general the option pays 1 on the event { ) ( ) and sup S t( b t T or inf t T S t ( ) } b
23 Double barriers - introduction We want to apply the above methodology to derivatives with digital payoff conditional on the stock price reaching/not reaching two levels. Continuity of paths implies level crossings (i.e. payoffs) are not affected by time-changing. An example is given by a double touch: supt T S t b and inf t T S t b. 1 supu τ B u b and inf u τ B u b In general the option pays 1 on the event { ) ( ) and sup S t( b t T or inf t T S t ( ) } b
24 Double barriers - introduction There are 8 possible digital double barrier options. However using complements and symmetry, it suffices to consider 3 types: double touch option new solutions to the SEP. double touch/no-touch option new solutions to the SEP. double no-touch option maximised by Perkins construction and minimised by the tilted-jacka (A. Cox) construction.
25 Double barriers - introduction There are 8 possible digital double barrier options. However using complements and symmetry, it suffices to consider 3 types: double touch option new solutions to the SEP. double touch/no-touch option new solutions to the SEP. double no-touch option maximised by Perkins construction and minimised by the tilted-jacka (A. Cox) construction.
26 Double barriers - introduction There are 8 possible digital double barrier options. However using complements and symmetry, it suffices to consider 3 types: double touch option new solutions to the SEP. double touch/no-touch option new solutions to the SEP. double no-touch option maximised by Perkins construction and minimised by the tilted-jacka (A. Cox) construction.
27 Double no touch: Answer to Q1 Write B t = sup s t B s, B t = inf s t B s : B t γ + ( B t ) inf{t : B t (γ (B t ),γ + ( B t ))} Maximises: P(B τ b and B τ b) γ (B t ) Perkins (1985) B t
28 Double no touch: Answer to Q1 Write B t = sup s t B s, B t = inf s t B s : B t γ + ( B t ) inf{t : B t (γ (B t ),γ + ( B t ))} Maximises: P(B τ b and B τ b) γ (B t ) Perkins (1985) B t
29 Double no touch: Answer to Q2 Consider pathwise inequality: 1 {ST b,s T b} 1 S T >b (b S T) + where b < S 0 < K. When S T > b, we get: K b + (S T K) + S T b K b K b 1 S T b 1 1 ST >b + (S T K) + K b b K
30 Double no touch: Answer to Q2 Consider pathwise inequality: 1 {ST b,s T b} 1 S T >b (b S T) + where b < S 0 < K. When S T b, we get: K b + (S T K) + S T b K b K b 1 S T b 0 (K S T) + 1 K b {ST >b} b K
31 Double no touch: Answer to Q2 Consider pathwise inequality: 1 {ST b,s T b} 1 S T >b (b S T) + where b < S 0 < K. K b + (S T K) + S T b K b K b 1 S T b This is a model free superhedging strategy for any b < K.
32 Double no touch: Answer to Q2 Consider pathwise inequality: 1 {ST b,s T b} 1 S T >b }{{} Digital call (b S T) + K b } {{ } Puts S T b K b 1 S T b }{{} Forwards upon hitting b + (S T K) + K b }{{} Calls =: H II (K) This is a model free superhedging strategy for any b < K, assuming (S t ) does not jump across the barrier b.
33 Double no touch: Answer to Q2 Consider pathwise inequality: 1 {ST b,s T b} 1 S T >b }{{} Digital call (b S T) + K b } {{ } Puts S T b K b 1 S T b }{{} Forwards upon hitting b + (S T K) + K b }{{} Calls =: H II (K) We would like to show that it is a hedging strategy in some model. It turns out that the above construction is not always optimal there are two more strategies H I, H III (K) we need to consider. Above we superhedged 1 ST >b as in Brown, Hobson, Rogers (2001) and it s good only for b < S 0 << b.
34 Double touch: superhedging Write P for the pricing operator. No arbitrage should imply: } P1 {ST b,s T b} {PH inf I, PH II (K 2 ), PH III (K 3 ) =: UB ( ) where the infimum is taken over values of K 2 > b, K 3 < b. Theorem ( Meta-Theorem ) No arbitrage iff ( ) holds and for any given curve of call prices there exists a stock price process for which ( ) is the price of the double no touch option.
35 Double touch: superhedging Write P for the pricing operator. No arbitrage should imply: } P1 {ST b,s T b} {PH inf I, PH II (K 2 ), PH III (K 3 ) =: UB ( ) where the infimum is taken over values of K 2 > b, K 3 < b. Theorem ( Meta-Theorem ) No arbitrage iff ( ) holds and for any given curve of call prices there exists a stock price process for which ( ) is the price of the double no touch option.
36 General setup We assume (S t : t T) takes values in some functional space P, and (S t ) has zero cost of carry (e.g. interest rates are zero). The set of traded assets X is given. On this set we have a pricing operator P which acts linearly on X, P : Lin(X) R. We say that there exists a (P, X) market model if there is a model (Ω, F,(F t ), Q,(S t )) with PX = E Q X, X X. We would like to have P admits no arbitrage on X there exists a market model Then we want to consider X {O T } for an exotic O T : P R and say P admits no arbitrage on X {O T } LB PO T UB there exists a (P, X {O T }) market model
37 General setup We assume (S t : t T) takes values in some functional space P, and (S t ) has zero cost of carry (e.g. interest rates are zero). The set of traded assets X is given. On this set we have a pricing operator P which acts linearly on X, P : Lin(X) R. We say that there exists a (P, X) market model if there is a model (Ω, F,(F t ), Q,(S t )) with PX = E Q X, X X. We would like to have P admits no arbitrage on X there exists a market model Then we want to consider X {O T } for an exotic O T : P R and say P admits no arbitrage on X {O T } LB PO T UB there exists a (P, X {O T }) market model
38 General setup We assume (S t : t T) takes values in some functional space P, and (S t ) has zero cost of carry (e.g. interest rates are zero). The set of traded assets X is given. On this set we have a pricing operator P which acts linearly on X, P : Lin(X) R. We say that there exists a (P, X) market model if there is a model (Ω, F,(F t ), Q,(S t )) with PX = E Q X, X X. We would like to have P admits no arbitrage on X there exists a market model Then we want to consider X {O T } for an exotic O T : P R and say P admits no arbitrage on X {O T } LB PO T UB there exists a (P, X {O T }) market model
39 Three notions of arbitrage Definition (Model free arbitrage) We say that P admits a model free arbitrage on X if there exists X Lin(X) with X 0 and PX < 0.
40 Three notions of arbitrage Definition (Model free arbitrage) We say that P admits a model free arbitrage on X if there exists X Lin(X) with X 0 and PX < 0. This coarsest notion is typically sufficient to derive no arbitrage bounds but not sufficient to give existence of a market model. Consider X = {(S T K) + : K K = {K 1,...,K n }}. No MFA implies interpolation of C(K) := P(S T K) + is convex and non-increasing. We could have C(K n 1 ) = C(K n ) > 0. But this leads to arbitrage strategies: if I have a model with S T K n a.s., I sell call with strike K n, if I have a model with P(S T > K n ) > 0 I sell call with strike K n and buy call with strike K n 1.
41 Three notions of arbitrage Definition (Model free arbitrage) We say that P admits a model free arbitrage on X if there exists X Lin(X) with X 0 and PX < 0. Definition (Weak arbitrage (Davis & Hobson 2007)) We say that P admits a weak arbitrage on X if for any model, there exists X Lin(X) with PX 0 but P(X 0) = 1, P(X > 0) > 0. Definition (Weak free lunch with vanishing risk) We say that P admits a weak free lunch with vanishing risk on X if there exists X n,z Lin(X) such that X n X (pointwise on P), X n Z, X 0 and lim PX n < 0.
42 Three notions of arbitrage Definition (Model free arbitrage) We say that P admits a model free arbitrage on X if there exists X Lin(X) with X 0 and PX < 0. Definition (Weak arbitrage (Davis & Hobson 2007)) We say that P admits a weak arbitrage on X if for any model, there exists X Lin(X) with PX 0 but P(X 0) = 1, P(X > 0) > 0. Definition (Weak free lunch with vanishing risk) We say that P admits a weak free lunch with vanishing risk on X if there exists X n,z Lin(X) such that X n X (pointwise on P), X n Z, X 0 and lim PX n < 0.
43 Call prices and no arbitrages Proposition (Davis and Hobson (2007)) Let X = {1,(S T K) + : K K} be finite. Then P admits no WA on X if and only if there exists a (P, X)-market model.
44 Proposition Call prices and no arbitrages Let X = {1,(S T K) + : K 0}. Then P admits no WFLVR on X if and only if there exists a (P, X)-market model, which happens if and only if C(K) = P(S T K) + 0 is convex and non-increasing, and C(0) = S 0, C +(0) 1, (1) C(K) 0 as K. (2) In comparison, P admits no model-free arbitrage on X if and only if (1) holds. In consequence, when (1) holds but (2) fails P admits no model-free arbitrage but a market model does not exist.
45 Call and digital call prices and no arbitrages Proposition Let X = {1,1 ST >b,1 ST b,(s T K) + : K 0}. Then P admits no WFLVR on X if and only if there exists a (P, X)-market model, which happens if and only if C(K) is as previously and P1 ST >b = C (b+) and P1 ST b = C (b ).
46 Call and digital call prices and no arbitrages Proposition Let X = {1,1 ST >b,1 ST b,(s T K) + : K 0}. Then P admits no WFLVR on X if and only if there exists a (P, X)-market model, which happens if and only if C(K) is as previously and P1 ST >b = C (b+) and P1 ST b = C (b ). Proposition Let X = {1,1 ST >b,1 ST b,(s T K) + : K K} be finite. Then P admits no WA on X if and only if there exists a (P, X)-market model. In both cases no WFLVR or no WA are strictly stronger than no model free arbitrage.
47 Call and digital call prices and no arbitrages Proposition Let X = {1,1 ST >b,1 ST b,(s T K) + : K 0}. Then P admits no WFLVR on X if and only if there exists a (P, X)-market model, which happens if and only if C(K) is as previously and P1 ST >b = C (b+) and P1 ST b = C (b ). Proposition Let X = {1,1 ST >b,1 ST b,(s T K) + : K K} be finite. Then P admits no WA on X if and only if there exists a (P, X)-market model. In both cases no WFLVR or no WA are strictly stronger than no model free arbitrage.
48 All our main results for digital double barriers are of this type with WA replacing WLVR for the case of finite family of traded strikes. Theorem Double barriers and no arbitrage Let P = C([0,T]). Suppose P admits no WFLVR on X = {forwards} {1,1 ST >b,1 ST b,(s T K) + : K 0}. Then the following are equivalent P admits no WFLVR on X {1 {ST b,s T b} }, there exists a (P, X {1 {ST b,s T b} }) market model, } P(1 {ST b, S T b} {P(H ) inf I ), P(H II (K 2 )), P(H III (K 3 )), } P(1 {ST b, S T b} {P(H ) sup I ), P(H II (K 1,K 2 )). (and we specify the hedges & strike(s) which attain inf/sup).
49 Summary Given a set of traded assets we want to construct robust super- and sub- hedging strategies of an exotic option. Further, we want them to be optimal in the sense that there exists a model, matching the market input, in which they are the hedging strategies. We carry out this programme for all types of digital double barrier options when the set of traded assets includes calls, digital calls and forward transactions. We introduce a formalism for the model free setup and define stronger notions of arbitrage (WFLVR and WA). There exists a market model (matching the input) iff appropriate no arbitrage holds. Further, the same holds if we add a double barrier, and this is equivalent to its price being within the bounds we derive.
50 Summary Given a set of traded assets we want to construct robust super- and sub- hedging strategies of an exotic option. Further, we want them to be optimal in the sense that there exists a model, matching the market input, in which they are the hedging strategies. We carry out this programme for all types of digital double barrier options when the set of traded assets includes calls, digital calls and forward transactions. We introduce a formalism for the model free setup and define stronger notions of arbitrage (WFLVR and WA). There exists a market model (matching the input) iff appropriate no arbitrage holds. Further, the same holds if we add a double barrier, and this is equivalent to its price being within the bounds we derive.
51 Summary Given a set of traded assets we want to construct robust super- and sub- hedging strategies of an exotic option. Further, we want them to be optimal in the sense that there exists a model, matching the market input, in which they are the hedging strategies. We carry out this programme for all types of digital double barrier options when the set of traded assets includes calls, digital calls and forward transactions. We introduce a formalism for the model free setup and define stronger notions of arbitrage (WFLVR and WA). There exists a market model (matching the input) iff appropriate no arbitrage holds. Further, the same holds if we add a double barrier, and this is equivalent to its price being within the bounds we derive.
52 Summary Given a set of traded assets we want to construct robust super- and sub- hedging strategies of an exotic option. Further, we want them to be optimal in the sense that there exists a model, matching the market input, in which they are the hedging strategies. We carry out this programme for all types of digital double barrier options when the set of traded assets includes calls, digital calls and forward transactions. We introduce a formalism for the model free setup and define stronger notions of arbitrage (WFLVR and WA). There exists a market model (matching the input) iff appropriate no arbitrage holds. Further, the same holds if we add a double barrier, and this is equivalent to its price being within the bounds we derive.
Model-independent bounds for Asian options
Model-independent bounds for Asian options A dynamic programming approach Alexander M. G. Cox 1 Sigrid Källblad 2 1 University of Bath 2 CMAP, École Polytechnique University of Michigan, 2nd December,
More informationModel-independent bounds for Asian options
Model-independent bounds for Asian options A dynamic programming approach Alexander M. G. Cox 1 Sigrid Källblad 2 1 University of Bath 2 CMAP, École Polytechnique 7th General AMaMeF and Swissquote Conference
More informationRobust hedging of double touch barrier options
Robust hedging of double touch barrier options A. M. G. Cox Dept. of Mathematical Sciences University of Bath Bath BA2 7AY, UK Jan Ob lój Mathematical Institute and Oxford-Man Institute of Quantitative
More informationOptimal robust bounds for variance options and asymptotically extreme models
Optimal robust bounds for variance options and asymptotically extreme models Alexander Cox 1 Jiajie Wang 2 1 University of Bath 2 Università di Roma La Sapienza Advances in Financial Mathematics, 9th January,
More informationRobust Hedging of Options on a Leveraged Exchange Traded Fund
Robust Hedging of Options on a Leveraged Exchange Traded Fund Alexander M. G. Cox Sam M. Kinsley University of Bath Recent Advances in Financial Mathematics, Paris, 10th January, 2017 A. M. G. Cox, S.
More informationRobust Pricing and Hedging of Options on Variance
Robust Pricing and Hedging of Options on Variance Alexander Cox Jiajie Wang University of Bath Bachelier 21, Toronto Financial Setting Option priced on an underlying asset S t Dynamics of S t unspecified,
More informationarxiv: v1 [q-fin.pr] 6 Jan 2009
Robust pricing and hedging of double no-touch options arxiv:0901.0674v1 [q-fin.pr] 6 Jan 2009 Alexander M. G. Cox Dept. of Mathematical Sciences, University of Bath Bath BA2 7AY, UK Jan Ob lój Oxford-Man
More informationHow do Variance Swaps Shape the Smile?
How do Variance Swaps Shape the Smile? A Summary of Arbitrage Restrictions and Smile Asymptotics Vimal Raval Imperial College London & UBS Investment Bank www2.imperial.ac.uk/ vr402 Joint Work with Mark
More informationUniversity of Oxford. Robust hedging of digital double touch barrier options. Ni Hao
University of Oxford Robust hedging of digital double touch barrier options Ni Hao Lady Margaret Hall MSc in Mathematical and Computational Finance Supervisor: Dr Jan Ob lój Oxford, June of 2009 Contents
More informationArbitrage Theory without a Reference Probability: challenges of the model independent approach
Arbitrage Theory without a Reference Probability: challenges of the model independent approach Matteo Burzoni Marco Frittelli Marco Maggis June 30, 2015 Abstract In a model independent discrete time financial
More informationArbitrage Bounds for Weighted Variance Swap Prices
Arbitrage Bounds for Weighted Variance Swap Prices Mark Davis Imperial College London Jan Ob lój University of Oxford and Vimal Raval Imperial College London January 13, 21 Abstract Consider a frictionless
More informationNo-Arbitrage Bounds on Two One-Touch Options
No-Arbitrage Bounds on Two One-Touch Options Yukihiro Tsuzuki March 30, 04 Abstract This paper investigates the pricing bounds of two one-touch options with the same maturity but different barrier levels,
More informationModel-Independent Bounds for Option Prices
Model-Independent Bounds for Option Prices Kilian Russ * Introduction The 2008 financial crisis and its dramatic consequences fuelled an ongoing debate on the principles and methods underlying the financial
More informationModel Free Hedging. David Hobson. Bachelier World Congress Brussels, June University of Warwick
Model Free Hedging David Hobson University of Warwick www.warwick.ac.uk/go/dhobson Bachelier World Congress Brussels, June 2014 Overview The classical model-based approach Robust or model-independent pricing
More informationModel-Independent Arbitrage Bounds on American Put Options
Model-Independent Arbitrage Bounds on American Put Options submitted by Christoph Hoeggerl for the degree of Doctor of Philosophy of the University of Bath Department of Mathematical Sciences December
More informationThe Skorokhod Embedding Problem and Model Independent Bounds for Options Prices. David Hobson University of Warwick
The Skorokhod Embedding Problem and Model Independent Bounds for Options Prices David Hobson University of Warwick www.warwick.ac.uk/go/dhobson Summer School in Financial Mathematics, Ljubljana, September
More informationArbitrage Bounds for Volatility Derivatives as Free Boundary Problem. Bruno Dupire Bloomberg L.P. NY
Arbitrage Bounds for Volatility Derivatives as Free Boundary Problem Bruno Dupire Bloomberg L.P. NY bdupire@bloomberg.net PDE and Mathematical Finance, KTH, Stockholm August 16, 25 Variance Swaps Vanilla
More informationRobust hedging with tradable options under price impact
- Robust hedging with tradable options under price impact Arash Fahim, Florida State University joint work with Y-J Huang, DCU, Dublin March 2016, ECFM, WPI practice is not robust - Pricing under a selected
More informationWeak Reflection Principle and Static Hedging of Barrier Options
Weak Reflection Principle and Static Hedging of Barrier Options Sergey Nadtochiy Department of Mathematics University of Michigan Apr 2013 Fields Quantitative Finance Seminar Fields Institute, Toronto
More informationMartingale Optimal Transport and Robust Finance
Martingale Optimal Transport and Robust Finance Marcel Nutz Columbia University (with Mathias Beiglböck and Nizar Touzi) April 2015 Marcel Nutz (Columbia) Martingale Optimal Transport and Robust Finance
More informationRobust pricing and hedging under trading restrictions and the emergence of local martingale models
Robust pricing and hedging under trading restrictions and the emergence of local martingale models Alexander M. G. Cox Zhaoxu Hou Jan Ob lój June 9, 2015 arxiv:1406.0551v2 [q-fin.mf] 8 Jun 2015 Abstract
More informationPathwise Finance: Arbitrage and Pricing-Hedging Duality
Pathwise Finance: Arbitrage and Pricing-Hedging Duality Marco Frittelli Milano University Based on joint works with Matteo Burzoni, Z. Hou, Marco Maggis and J. Obloj CFMAR 10th Anniversary Conference,
More informationA Robust Option Pricing Problem
IMA 2003 Workshop, March 12-19, 2003 A Robust Option Pricing Problem Laurent El Ghaoui Department of EECS, UC Berkeley 3 Robust optimization standard form: min x sup u U f 0 (x, u) : u U, f i (x, u) 0,
More informationMASSACHUSETTS INSTITUTE OF TECHNOLOGY 6.265/15.070J Fall 2013 Lecture 11 10/9/2013. Martingales and stopping times II
MASSACHUSETTS INSTITUTE OF TECHNOLOGY 6.65/15.070J Fall 013 Lecture 11 10/9/013 Martingales and stopping times II Content. 1. Second stopping theorem.. Doob-Kolmogorov inequality. 3. Applications of stopping
More informationOn the Lower Arbitrage Bound of American Contingent Claims
On the Lower Arbitrage Bound of American Contingent Claims Beatrice Acciaio Gregor Svindland December 2011 Abstract We prove that in a discrete-time market model the lower arbitrage bound of an American
More informationM5MF6. Advanced Methods in Derivatives Pricing
Course: Setter: M5MF6 Dr Antoine Jacquier MSc EXAMINATIONS IN MATHEMATICS AND FINANCE DEPARTMENT OF MATHEMATICS April 2016 M5MF6 Advanced Methods in Derivatives Pricing Setter s signature...........................................
More informationCONTINUOUS TIME PRICING AND TRADING: A REVIEW, WITH SOME EXTRA PIECES
CONTINUOUS TIME PRICING AND TRADING: A REVIEW, WITH SOME EXTRA PIECES THE SOURCE OF A PRICE IS ALWAYS A TRADING STRATEGY SPECIAL CASES WHERE TRADING STRATEGY IS INDEPENDENT OF PROBABILITY MEASURE COMPLETENESS,
More informationThe Azema Yor embedding in non-singular diusions
Stochastic Processes and their Applications 96 2001 305 312 www.elsevier.com/locate/spa The Azema Yor embedding in non-singular diusions J.L. Pedersen a;, G. Peskir b a Department of Mathematics, ETH-Zentrum,
More informationMATH3075/3975 FINANCIAL MATHEMATICS TUTORIAL PROBLEMS
MATH307/37 FINANCIAL MATHEMATICS TUTORIAL PROBLEMS School of Mathematics and Statistics Semester, 04 Tutorial problems should be used to test your mathematical skills and understanding of the lecture material.
More informationAre the Azéma-Yor processes truly remarkable?
Are the Azéma-Yor processes truly remarkable? Jan Obłój j.obloj@imperial.ac.uk based on joint works with L. Carraro, N. El Karoui, A. Meziou and M. Yor Welsh Probability Seminar, 17 Jan 28 Are the Azéma-Yor
More informationCasino gambling problem under probability weighting
Casino gambling problem under probability weighting Sang Hu National University of Singapore Mathematical Finance Colloquium University of Southern California Jan 25, 2016 Based on joint work with Xue
More informationA MODEL-FREE VERSION OF THE FUNDAMENTAL THEOREM OF ASSET PRICING AND THE SUPER-REPLICATION THEOREM. 1. Introduction
A MODEL-FREE VERSION OF THE FUNDAMENTAL THEOREM OF ASSET PRICING AND THE SUPER-REPLICATION THEOREM B. ACCIAIO, M. BEIGLBÖCK, F. PENKNER, AND W. SCHACHERMAYER Abstract. We propose a Fundamental Theorem
More informationPerformance of robust model-free hedging via Skorokhod embeddings of digital double barrier options
Performance of robust model-free hedging via Skorokhod embeddings of digital double barrier options University of Oxford A thesis submitted in partial fulfillment of the MSc in Mathematical Finance April
More informationLECTURE 4: BID AND ASK HEDGING
LECTURE 4: BID AND ASK HEDGING 1. Introduction One of the consequences of incompleteness is that the price of derivatives is no longer unique. Various strategies for dealing with this exist, but a useful
More informationAre the Azéma-Yor processes truly remarkable?
Are the Azéma-Yor processes truly remarkable? Jan Obłój j.obloj@imperial.ac.uk based on joint works with L. Carraro, N. El Karoui, A. Meziou and M. Yor Swiss Probability Seminar, 5 Dec 2007 Are the Azéma-Yor
More informationThe Azéma-Yor Embedding in Non-Singular Diffusions
The Azéma-Yor Embedding in Non-Singular Diffusions J.L. Pedersen and G. Peskir Let (X t ) t 0 be a non-singular (not necessarily recurrent) diffusion on R starting at zero, and let ν be a probability measure
More informationINTRODUCTION TO THE ECONOMICS AND MATHEMATICS OF FINANCIAL MARKETS. Jakša Cvitanić and Fernando Zapatero
INTRODUCTION TO THE ECONOMICS AND MATHEMATICS OF FINANCIAL MARKETS Jakša Cvitanić and Fernando Zapatero INTRODUCTION TO THE ECONOMICS AND MATHEMATICS OF FINANCIAL MARKETS Table of Contents PREFACE...1
More informationPricing Dynamic Solvency Insurance and Investment Fund Protection
Pricing Dynamic Solvency Insurance and Investment Fund Protection Hans U. Gerber and Gérard Pafumi Switzerland Abstract In the first part of the paper the surplus of a company is modelled by a Wiener process.
More information1.1 Basic Financial Derivatives: Forward Contracts and Options
Chapter 1 Preliminaries 1.1 Basic Financial Derivatives: Forward Contracts and Options A derivative is a financial instrument whose value depends on the values of other, more basic underlying variables
More informationRobust Trading of Implied Skew
Robust Trading of Implied Skew Sergey Nadtochiy and Jan Obłój Current version: Nov 16, 2016 Abstract In this paper, we present a method for constructing a (static) portfolio of co-maturing European options
More informationConsistency of option prices under bid-ask spreads
Consistency of option prices under bid-ask spreads Stefan Gerhold TU Wien Joint work with I. Cetin Gülüm MFO, Feb 2017 (TU Wien) MFO, Feb 2017 1 / 32 Introduction The consistency problem Overview Consistency
More informationSensitivity of American Option Prices with Different Strikes, Maturities and Volatilities
Applied Mathematical Sciences, Vol. 6, 2012, no. 112, 5597-5602 Sensitivity of American Option Prices with Different Strikes, Maturities and Volatilities Nasir Rehman Department of Mathematics and Statistics
More informationTangent Lévy Models. Sergey Nadtochiy (joint work with René Carmona) Oxford-Man Institute of Quantitative Finance University of Oxford.
Tangent Lévy Models Sergey Nadtochiy (joint work with René Carmona) Oxford-Man Institute of Quantitative Finance University of Oxford June 24, 2010 6th World Congress of the Bachelier Finance Society Sergey
More informationHow to hedge Asian options in fractional Black-Scholes model
How to hedge Asian options in fractional Black-Scholes model Heikki ikanmäki Jena, March 29, 211 Fractional Lévy processes 1/36 Outline of the talk 1. Introduction 2. Main results 3. Methodology 4. Conclusions
More informationInsider information and arbitrage profits via enlargements of filtrations
Insider information and arbitrage profits via enlargements of filtrations Claudio Fontana Laboratoire de Probabilités et Modèles Aléatoires Université Paris Diderot XVI Workshop on Quantitative Finance
More informationLecture 15: Exotic Options: Barriers
Lecture 15: Exotic Options: Barriers Dr. Hanqing Jin Mathematical Institute University of Oxford Lecture 15: Exotic Options: Barriers p. 1/10 Barrier features For any options with payoff ξ at exercise
More informationHedging Credit Derivatives in Intensity Based Models
Hedging Credit Derivatives in Intensity Based Models PETER CARR Head of Quantitative Financial Research, Bloomberg LP, New York Director of the Masters Program in Math Finance, Courant Institute, NYU Stanford
More informationMartingale Optimal Transport and Robust Hedging
Martingale Optimal Transport and Robust Hedging Ecole Polytechnique, Paris Angers, September 3, 2015 Outline Optimal Transport and Model-free hedging The Monge-Kantorovitch optimal transport problem Financial
More informationViability, Arbitrage and Preferences
Viability, Arbitrage and Preferences H. Mete Soner ETH Zürich and Swiss Finance Institute Joint with Matteo Burzoni, ETH Zürich Frank Riedel, University of Bielefeld Thera Stochastics in Honor of Ioannis
More informationThe Birth of Financial Bubbles
The Birth of Financial Bubbles Philip Protter, Cornell University Finance and Related Mathematical Statistics Issues Kyoto Based on work with R. Jarrow and K. Shimbo September 3-6, 2008 Famous bubbles
More informationOptimal Hedging of Variance Derivatives. John Crosby. Centre for Economic and Financial Studies, Department of Economics, Glasgow University
Optimal Hedging of Variance Derivatives John Crosby Centre for Economic and Financial Studies, Department of Economics, Glasgow University Presentation at Baruch College, in New York, 16th November 2010
More information"Vibrato" Monte Carlo evaluation of Greeks
"Vibrato" Monte Carlo evaluation of Greeks (Smoking Adjoints: part 3) Mike Giles mike.giles@maths.ox.ac.uk Oxford University Mathematical Institute Oxford-Man Institute of Quantitative Finance MCQMC 2008,
More informationArbitrage of the first kind and filtration enlargements in semimartingale financial models. Beatrice Acciaio
Arbitrage of the first kind and filtration enlargements in semimartingale financial models Beatrice Acciaio the London School of Economics and Political Science (based on a joint work with C. Fontana and
More informationChapter 15: Jump Processes and Incomplete Markets. 1 Jumps as One Explanation of Incomplete Markets
Chapter 5: Jump Processes and Incomplete Markets Jumps as One Explanation of Incomplete Markets It is easy to argue that Brownian motion paths cannot model actual stock price movements properly in reality,
More informationProspect Theory, Partial Liquidation and the Disposition Effect
Prospect Theory, Partial Liquidation and the Disposition Effect Vicky Henderson Oxford-Man Institute of Quantitative Finance University of Oxford vicky.henderson@oxford-man.ox.ac.uk 6th Bachelier Congress,
More informationDrunken Birds, Brownian Motion, and Other Random Fun
Drunken Birds, Brownian Motion, and Other Random Fun Michael Perlmutter Department of Mathematics Purdue University 1 M. Perlmutter(Purdue) Brownian Motion and Martingales Outline Review of Basic Probability
More information- Introduction to Mathematical Finance -
- Introduction to Mathematical Finance - Lecture Notes by Ulrich Horst The objective of this course is to give an introduction to the probabilistic techniques required to understand the most widely used
More informationVariation Swaps on Time-Changed Lévy Processes
Variation Swaps on Time-Changed Lévy Processes Bachelier Congress 2010 June 24 Roger Lee University of Chicago RL@math.uchicago.edu Joint with Peter Carr Robust pricing of derivatives Underlying F. Some
More informationStructural Models of Credit Risk and Some Applications
Structural Models of Credit Risk and Some Applications Albert Cohen Actuarial Science Program Department of Mathematics Department of Statistics and Probability albert@math.msu.edu August 29, 2018 Outline
More informationA Consistent Pricing Model for Index Options and Volatility Derivatives
A Consistent Pricing Model for Index Options and Volatility Derivatives 6th World Congress of the Bachelier Society Thomas Kokholm Finance Research Group Department of Business Studies Aarhus School of
More informationMSc Financial Mathematics
MSc Financial Mathematics The following information is applicable for academic year 2018-19 Programme Structure Week Zero Induction Week MA9010 Fundamental Tools TERM 1 Weeks 1-1 0 ST9080 MA9070 IB9110
More informationMartingale Transport, Skorokhod Embedding and Peacocks
Martingale Transport, Skorokhod Embedding and CEREMADE, Université Paris Dauphine Collaboration with Pierre Henry-Labordère, Nizar Touzi 08 July, 2014 Second young researchers meeting on BSDEs, Numerics
More informationFunctional vs Banach space stochastic calculus & strong-viscosity solutions to semilinear parabolic path-dependent PDEs.
Functional vs Banach space stochastic calculus & strong-viscosity solutions to semilinear parabolic path-dependent PDEs Andrea Cosso LPMA, Université Paris Diderot joint work with Francesco Russo ENSTA,
More informationRisk-Neutral Valuation
N.H. Bingham and Rüdiger Kiesel Risk-Neutral Valuation Pricing and Hedging of Financial Derivatives W) Springer Contents 1. Derivative Background 1 1.1 Financial Markets and Instruments 2 1.1.1 Derivative
More informationApplication of Stochastic Calculus to Price a Quanto Spread
Application of Stochastic Calculus to Price a Quanto Spread Christopher Ting http://www.mysmu.edu/faculty/christophert/ Algorithmic Quantitative Finance July 15, 2017 Christopher Ting July 15, 2017 1/33
More informationModule 4: Monte Carlo path simulation
Module 4: Monte Carlo path simulation Prof. Mike Giles mike.giles@maths.ox.ac.uk Oxford University Mathematical Institute Module 4: Monte Carlo p. 1 SDE Path Simulation In Module 2, looked at the case
More informationHedging under Arbitrage
Hedging under Arbitrage Johannes Ruf Columbia University, Department of Statistics Modeling and Managing Financial Risks January 12, 2011 Motivation Given: a frictionless market of stocks with continuous
More informationbased on two joint papers with Sara Biagini Scuola Normale Superiore di Pisa, Università degli Studi di Perugia
Marco Frittelli Università degli Studi di Firenze Winter School on Mathematical Finance January 24, 2005 Lunteren. On Utility Maximization in Incomplete Markets. based on two joint papers with Sara Biagini
More information6: MULTI-PERIOD MARKET MODELS
6: MULTI-PERIOD MARKET MODELS Marek Rutkowski School of Mathematics and Statistics University of Sydney Semester 2, 2016 M. Rutkowski (USydney) 6: Multi-Period Market Models 1 / 55 Outline We will examine
More informationLecture 1: Lévy processes
Lecture 1: Lévy processes A. E. Kyprianou Department of Mathematical Sciences, University of Bath 1/ 22 Lévy processes 2/ 22 Lévy processes A process X = {X t : t 0} defined on a probability space (Ω,
More informationMonte Carlo Methods. Prof. Mike Giles. Oxford University Mathematical Institute. Lecture 1 p. 1.
Monte Carlo Methods Prof. Mike Giles mike.giles@maths.ox.ac.uk Oxford University Mathematical Institute Lecture 1 p. 1 Geometric Brownian Motion In the case of Geometric Brownian Motion ds t = rs t dt+σs
More informationUNIFORM BOUNDS FOR BLACK SCHOLES IMPLIED VOLATILITY
UNIFORM BOUNDS FOR BLACK SCHOLES IMPLIED VOLATILITY MICHAEL R. TEHRANCHI UNIVERSITY OF CAMBRIDGE Abstract. The Black Scholes implied total variance function is defined by V BS (k, c) = v Φ ( k/ v + v/2
More informationChanges of the filtration and the default event risk premium
Changes of the filtration and the default event risk premium Department of Banking and Finance University of Zurich April 22 2013 Math Finance Colloquium USC Change of the probability measure Change of
More informationExponential utility maximization under partial information
Exponential utility maximization under partial information Marina Santacroce Politecnico di Torino Joint work with M. Mania AMaMeF 5-1 May, 28 Pitesti, May 1th, 28 Outline Expected utility maximization
More informationA Lower Bound for Calls on Quadratic Variation
A Lower Bound for Calls on Quadratic Variation PETER CARR Head of Quantitative Financial Research, Bloomberg LP, New York Director of the Masters Program in Math Finance, Courant Institute, NYU Chicago,
More informationEstimation of Value at Risk and ruin probability for diffusion processes with jumps
Estimation of Value at Risk and ruin probability for diffusion processes with jumps Begoña Fernández Universidad Nacional Autónoma de México joint work with Laurent Denis and Ana Meda PASI, May 21 Begoña
More informationA New Tool For Correlation Risk Management: The Market Implied Comonotonicity Gap
A New Tool For Correlation Risk Management: The Market Implied Comonotonicity Gap Peter Michael Laurence Department of Mathematics and Facoltà di Statistica Universitá di Roma, La Sapienza A New Tool For
More informationEFFICIENT MONTE CARLO ALGORITHM FOR PRICING BARRIER OPTIONS
Commun. Korean Math. Soc. 23 (2008), No. 2, pp. 285 294 EFFICIENT MONTE CARLO ALGORITHM FOR PRICING BARRIER OPTIONS Kyoung-Sook Moon Reprinted from the Communications of the Korean Mathematical Society
More informationEARLY EXERCISE OPTIONS: UPPER BOUNDS
EARLY EXERCISE OPTIONS: UPPER BOUNDS LEIF B.G. ANDERSEN AND MARK BROADIE Abstract. In this article, we discuss how to generate upper bounds for American or Bermudan securities by Monte Carlo methods. These
More informationLecture 4. Finite difference and finite element methods
Finite difference and finite element methods Lecture 4 Outline Black-Scholes equation From expectation to PDE Goal: compute the value of European option with payoff g which is the conditional expectation
More informationDrawdowns, Drawups, their joint distributions, detection and financial risk management
Drawdowns, Drawups, their joint distributions, detection and financial risk management June 2, 2010 The cases a = b The cases a > b The cases a < b Insuring against drawing down before drawing up Robust
More informationJournal of Mathematical Analysis and Applications
J Math Anal Appl 389 (01 968 978 Contents lists available at SciVerse Scienceirect Journal of Mathematical Analysis and Applications wwwelseviercom/locate/jmaa Cross a barrier to reach barrier options
More informationInstitute of Actuaries of India. Subject. ST6 Finance and Investment B. For 2018 Examinationspecialist Technical B. Syllabus
Institute of Actuaries of India Subject ST6 Finance and Investment B For 2018 Examinationspecialist Technical B Syllabus Aim The aim of the second finance and investment technical subject is to instil
More informationOptimal investment and contingent claim valuation in illiquid markets
and contingent claim valuation in illiquid markets Teemu Pennanen King s College London Ari-Pekka Perkkiö Technische Universität Berlin 1 / 35 In most models of mathematical finance, there is at least
More informationSmile in the low moments
Smile in the low moments L. De Leo, T.-L. Dao, V. Vargas, S. Ciliberti, J.-P. Bouchaud 10 jan 2014 Outline 1 The Option Smile: statics A trading style The cumulant expansion A low-moment formula: the moneyness
More informationPricing and hedging in incomplete markets
Pricing and hedging in incomplete markets Chapter 10 From Chapter 9: Pricing Rules: Market complete+nonarbitrage= Asset prices The idea is based on perfect hedge: H = V 0 + T 0 φ t ds t + T 0 φ 0 t ds
More informationMSc Financial Mathematics
MSc Financial Mathematics Programme Structure Week Zero Induction Week MA9010 Fundamental Tools TERM 1 Weeks 1-1 0 ST9080 MA9070 IB9110 ST9570 Probability & Numerical Asset Pricing Financial Stoch. Processes
More informationThe Uncertain Volatility Model
The Uncertain Volatility Model Claude Martini, Antoine Jacquier July 14, 008 1 Black-Scholes and realised volatility What happens when a trader uses the Black-Scholes (BS in the sequel) formula to sell
More informationThe Black-Scholes Model
IEOR E4706: Foundations of Financial Engineering c 2016 by Martin Haugh The Black-Scholes Model In these notes we will use Itô s Lemma and a replicating argument to derive the famous Black-Scholes formula
More informationBlack-Scholes and Game Theory. Tushar Vaidya ESD
Black-Scholes and Game Theory Tushar Vaidya ESD Sequential game Two players: Nature and Investor Nature acts as an adversary, reveals state of the world S t Investor acts by action a t Investor incurs
More informationFundamental Theorems of Asset Pricing. 3.1 Arbitrage and risk neutral probability measures
Lecture 3 Fundamental Theorems of Asset Pricing 3.1 Arbitrage and risk neutral probability measures Several important concepts were illustrated in the example in Lecture 2: arbitrage; risk neutral probability
More informationOptimal Stopping Rules of Discrete-Time Callable Financial Commodities with Two Stopping Boundaries
The Ninth International Symposium on Operations Research Its Applications (ISORA 10) Chengdu-Jiuzhaigou, China, August 19 23, 2010 Copyright 2010 ORSC & APORC, pp. 215 224 Optimal Stopping Rules of Discrete-Time
More information4: SINGLE-PERIOD MARKET MODELS
4: SINGLE-PERIOD MARKET MODELS Marek Rutkowski School of Mathematics and Statistics University of Sydney Semester 2, 2016 M. Rutkowski (USydney) Slides 4: Single-Period Market Models 1 / 87 General Single-Period
More informationOn Asymptotic Power Utility-Based Pricing and Hedging
On Asymptotic Power Utility-Based Pricing and Hedging Johannes Muhle-Karbe TU München Joint work with Jan Kallsen and Richard Vierthauer Workshop "Finance and Insurance", Jena Overview Introduction Utility-based
More informationAMH4 - ADVANCED OPTION PRICING. Contents
AMH4 - ADVANCED OPTION PRICING ANDREW TULLOCH Contents 1. Theory of Option Pricing 2 2. Black-Scholes PDE Method 4 3. Martingale method 4 4. Monte Carlo methods 5 4.1. Method of antithetic variances 5
More informationMultilevel Monte Carlo for Basket Options
MLMC for basket options p. 1/26 Multilevel Monte Carlo for Basket Options Mike Giles mike.giles@maths.ox.ac.uk Oxford University Mathematical Institute Oxford-Man Institute of Quantitative Finance WSC09,
More informationHedging Variance Options on Continuous Semimartingales
Hedging Variance Options on Continuous Semimartingales Peter Carr and Roger Lee This version : December 21, 28 Abstract We find robust model-free hedges and price bounds for options on the realized variance
More informationAdvanced Topics in Derivative Pricing Models. Topic 4 - Variance products and volatility derivatives
Advanced Topics in Derivative Pricing Models Topic 4 - Variance products and volatility derivatives 4.1 Volatility trading and replication of variance swaps 4.2 Volatility swaps 4.3 Pricing of discrete
More informationarxiv: v2 [q-fin.mf] 2 Oct 2016
Arbitrage without borrowing or short selling? Jani Lukkarinen Mikko S. Pakkanen 4 October 216 arxiv:164.769v2 [q-fin.mf] 2 Oct 216 Abstract We show that a trader, who starts with no initial wealth and
More informationComputational Finance. Computational Finance p. 1
Computational Finance Computational Finance p. 1 Outline Binomial model: option pricing and optimal investment Monte Carlo techniques for pricing of options pricing of non-standard options improving accuracy
More information